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Mallick: Market collapse is 2008 all over again, only worse Print E-mail

Aug 08, 2011 Heather Mallick thestar.com

How did it come to this?

This week’s market plunge was a long time in the making but there’s no doubt it was both foreseeable and preventable. It’s not 2008 all over again — it’s worse, although the same people are to blame. And no government has had the courage to correct its original sins. We never learn.

This time, because of the crisis in the eurozone, we’re no longer worried about the solvency of banks but of nation-states. Make that several nation-states in the eurozone plus an added horror in the U.S. that didn’t fade as President Barack Obama angrily signed the agreement to raise the debt ceiling.

He wouldn’t even sign it in public. An American president not preening for the cameras? Unheard of. Bank of Canada Governor Mark Carney fretting recently about a Canadian housing bubble? Not good. Canada and the U.S. cutting spending at what may well turn out to be the very moment their ideologues should have put their irrational love of state frugality on hold, if only for a year or two? Might well be fatal.

Don’t be smug about Canadian banks having endured the 2008 turmoil. This crisis crosses borders and is in some ways beyond governmental control. Citizens of Western nations have ceded so much control to the financial sector that we are ruled by hard-hearted financiers who can’t count nearly as well as they thought they could.

As Gillian Tett writes in the Financial Times of London — she’s the Paul Krugman of financial journalism, minus the sense of mission and resultant despair — this crisis resembles 2008 in significant ways.

At first, the crisis in Greece looked minor because Greece is a small country. Lehman and Bear Stearns were pretty tiny too, relatively speaking. As the crisis grew this year, it was downplayed. It wasn’t a problem of actual solvency, the experts said, merely liquidity, just like 2007 when Washington was taking baby steps to patch things up.

Then eurozone governments crossed a psychological Rubicon, as Tett put it, and shocked investors by explaining that eurozone debt wasn’t risk-free. This was the equivalent of Fannie Mae and Freddie Mac being put into conservatorship in 2008. Now, as then, investors fainted at the news.

Confidence eroded. If investors didn’t understand Fannie Mae’s true risk then, they certainly can’t accurately assess credit derivatives exposure now and to what extent it is linked across the eurozone. Even if there were a safe place, it’s impossible to identify it for sure.

So Portugal came next. Another tiny country. Then we heard rumblings about Spain and Italy needing help. When you hear Silvio Berlusconi advising Italians to hang onto their Treasury bonds — “I don’t think the markets will get worse” — it’s time to run for the hills.

A confidence crisis means short-term funding dries up. If banks can’t safely lend, you can’t safely borrow. You can’t hire. You can’t get a mortgage. You can’t keep a mortgage because you lost your job. This is classic 1932, sorry, 2008, and they had a drought then too.

“What is required,” the BBC’s Robert Peston said Friday, “is a circuit breaker in the transmission mechanism of fear.” The problem is that no government, including the U.S., is equipped and willing to provide it.

Germany is rich enough to fix the mess — in Europe, that is, but not the U.S., which has a political crisis too — but its chancellor is Angela Merkel, about whom the most damning thing has just been said, that she and Obama are soulmates.

They’re both mediators, even when she’s dealing with the rigid Bavarian right wing and he’s coping with the self-destructive mono-nation Tea Party, even when it’s entirely pointless. They are timid. They do not seize the moment. Obama threw away his chance to end the Bush tax cuts. Merkel may well refuse to rescue Europe.

Where lies help? We don’t know. But we do know one thing: the U.S. bankers whose criminality started the crisis were never punished. Greed was good for them. It still is.

 
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